integrAsian

2. Shifting sands

Production will shift from China to South-east Asia. In ten years, Myanmar is seen as a top destination to develop operations.

From efforts to liberalise trade such as the ASEAN Economic Community (AEC) to the emergence of the China-led Asian Infrastructure Investment Bank (AIIB), recent signs point to an increased focus on cooperation and integration among the region’s policymakers. Businesses in Asia, too, have been keen on exploiting opportunities in the region, with intra-Asia trade flows expected to surpass those in Europe as the world’s largest by region next year, according to consultancy McKinsey and the International Monetary Fund.

However, on-the-ground progress with integration remains limited in some respects. Intra-regional trade as a share of Asia’s total trade has barely budged over around 55% in the past decade, according to the Asian Development Bank. Goods or services moving from one Asian market to another must still often contend with varying standards and regulations or cumbersome customs procedures.

Large domestic markets take precedence for China and India

Among many of the region’s firms, a “home bias” remains. The focus on domestic markets seems greatest among firms in the region’s largest – India and China. Eighty-nine percent of firms surveyed in China named it as a target country for expansion over the next five years, making it by far their top pick, while 83% of Indian firms said the same about their home base. Many Chinese and Indian companies continue to see significant growth opportunities at home as consumer preferences develop. “Our focus so far has primarily been on India,” says Ajoy Misra, CEO and managing director at Kolkata-based Tata Global Beverages. “Enhanced water is an emerging segment in India and we think it has huge potential … green tea is another segment that has been seeing rapid growth.”

Regional expansion will benefit China, Indonesia and South Korea in particular

The survey also indicated many firms in Asia plan to extend their regional operations. South Korea is seen as increasingly important, with 54% of firms in China, 49% of companies in Indonesia and 35% of companies in Hong Kong identifying it as a top market for expansion in the next five years. Forty-one percent of companies from the manufacturing sector targeted South Korea, the second-highest choice after China. The trade corridor between China and India will be busy as well: 52% of firms in India chose China as a top expansion market, while 35% of respondents in China chose India.

A very significant share of manufacturers surveyed (82%) chose China as a top destination for expansion in the next five years. The survey results suggest that, at least in the next five years, manufacturing in China will remain robust despite a well-publicised increase in labour costs throughout the country. To be fair, in 2014 manufacturing labour costs in Shanghai, Jiangsu province and Guangdong province – important production areas in China – were lower than in South Korea, Brazil, Taiwan and Mexico.

Perhaps encouraged by the emergence of the AEC, scheduled to formally come into being by the end of 2015, intra-ASEAN trade and investment also seems poised to grow. Just under half of the companies in Singapore (48%) identified Indonesia as a top market for expansion in five years, and 39% of Indonesian firms said the same about Malaysia.

“I’m very keen on (the AEC) because I have factories in Vietnam, Thailand and Indonesia,” says Yoshiaki Ito, chief executive of the Asia operation of Chinese home appliance maker Haier Group. “If I can utilise the tax benefits to move products within this territory, that definitely helps me because I have a very ambitious goal to double the size of business in ASEAN countries in the next five years.”

Regional expansion will be driven primarily by emerging-market enterprises. Firms in China and Indonesia have the most capital-intensive expansion plans, with 60% or more of respondents planning to invest in new infrastructure over the next five years. Companies in China, India and Indonesia are the most likely to be hiring, with at least 50% of respondents in these countries saying they will add to their existing labour force.

Investment in Myanmar will accelerate on a ten-year horizon

Over the longer term, intra-regional investment will shift sharply away from China. Seven-in-ten respondents (71%) say they are planning on adding factories and/ or offices in China in five years, while only 22% say the same of Myanmar, which has seen foreign investment rise since a series of reforms in 2011-2012 opened up the economy after five decades of isolationist policies. The picture changes on a ten-year horizon. Forty-two percent of respondents say they will open a new factory or office in Myanmar in a decade, while only 23% will be looking at doing the same in China in that timeframe.

“Our investor base is ASEAN, the Middle East and India. Because they’re not that far away, they can see the opportunities,” says Michael Dean, executive director of Yangon-based Myanmar Investments, which helps channel foreign funds into infrastructure and other opportunities in the country.

However, the road to investment in Myanmar is not without its obstacles. Respondents planning on opening a few factory or office in Myanmar were more likely than others to find different consumer preferences and political corruption to be barriers to achieving a consistent sales strategy. “Asian companies are coming in (to Myanmar), they want to invest, but it’s still a bit ‘wild west’,” says Myanmar Investments’ Mr Dean.

What is striking is the focus on the services sector. Almost half the respondents (48%) from both the financial services and professional services sectors say in ten years they will open offices in Myanmar. Vietnam and Thailand will also see intra-Asian investment pick up in ten years, also led by the professional services sector. Between five and ten years, interest among Asian companies to open a factory or office in Vietnam and Thailand will rise to 38% and 36% from 30% and 31% respectively.